When Patents Attack ... Part Two!

This story from Planet Money's Alex Blumberg and NPR's Laura Sydell aired this weekend on This American Life. A shorter version of the piece is also airing today on All Things Considered. Here's the story.

Two years ago we brought you the story of Nathan Myhrvold and his company Intellectual Ventures. Myhrvold, a former chief technology officer at Microsoft, called the business "a company that invests in invention," but in Silicon Valley it has a different reputation. The influential blog Techdirt regularly refers to Intellectual Ventures as a patent troll. Techdirt and other technology blogs have written about how Intellectual Ventures uses its large patent portfolio to demand license fees from technology companies.

Intellectual Ventures told us if we wanted to understand what the company was all about, we should talk to this inventor it had helped out, a patent holder named Chris Crawford.

When we tried to contact Crawford, he didn't return any phone calls. He didn't return emails. His patents are now in the hands of a company called Oasis Research, and the patents were being used to sue more than a dozen different tech businesses.

Oasis Research has no researchers and no employees of any kind that we could find. Its only place of business seemed to be an empty office in a corridor of empty offices in a small town in Texas.

We had a lot of questions about Chris Crawford and Oasis Research, but because of the secretive nature of these lawsuits, there were basic questions we could not answer. Now, two years later, the litigation is over, and it has given us a rare look inside this world. Here's what we've learned:

Originally, there were 18 tech companies that Oasis claimed were infringing on Chris Crawford's patents. But that pool got smaller and smaller as companies decided to just cut a deal with Oasis and pay a licensing fee.

At a certain point, an online backup company called Carbonite was one of just two companies remaining in the case. The other company was EMC. (Full disclosure: Carbonite is an underwriter of NPR news programs.)

Carbonite CEO David Friend says it was tough to be one of the last men standing, especially when the company's lawyers kept encouraging Friend to settle.

Defending a patent case is really difficult because explaining technology and patents to a jury is a big challenge, so lawyers for Carbonite and EMC pursued a second strategy as well. If they could demonstrate that the inventor wasn't telling the truth when he filled out the patent application, the patent could be invalidated. So the lawyers for Carbonite and EMC started to dig into Crawford's past looking for evidence of this.

One of the first places they went looking was the company where Crawford was working at the time he claimed to have come up with his ideas. They found Crawford's old boss, Chuck Campos. Campos told them he was around when the ideas in the patents were developed, and that they weren't only Crawford's ideas.

Campos told the lawyers that the ideas mainly came from two other guys, Jack Byrd and Don Atwood. Byrd and Atwood were developing software together in 1990, and they wanted to come up with a secure way to back up their work. The only way to do that at the time was to download the work to floppy disk drives, but Byrd and Atwood thought there had to be a better way. They started a company to use phone modems to back up data remotely. They hired Campos and Crawford to help them.

The four men agreed to split ownership four ways, and Byrd named the new company PC Oasis. The "oasis" part of that name was an acronym — short for Offsite Archival Software and Information Server.

They met on Saturdays to discuss setting up the business, but they couldn't figure out a way to get it up and running using the technology available in the early '90s — phone lines and modems. So, they disbanded the company and went their separate ways.

It was the end of Oasis for Bryd, Atwood and Campos, but not for Crawford. Crawford had kept detailed notes of those Saturday meetings, and a couple of years later, he filed patents based on those notes.

Carbonite's chief counsel Danielle Sheer says Crawford then sold those patents to a company called Kwon Holdings for $12 million and a percentage of royalties that the next owner collects.

Sheer says that Byrd, Atwood and Campos knew "nothing about what Chris Crawford is doing. Nothing at all."

A decade later, those patents ended up the property of another company with Oasis in the name, Oasis Research, a company that pays Crawford a portion of the money it collects from the patents.

If Crawford's three former business partners had also developed the ideas, they should have been, at the very least, listed as co-inventors on Crawford's original patent applications. This was the smoking gun the lawyers had been looking for, but they weren't sure it would be enough to convince a jury. At the trial, it would still be just the word of Byrd, Atwood and Campos against Crawford's.

The lawyers wanted proof. They found it in the form of one sentence among thousands of pages that Crawford submitted to the patent office. The sentence was this:

"This proposal it is in response to Jack Byrd's idea to provide automated offsite backup services for PC users."

The lawyers for Carbonite and EMC argued that was conclusive evidence that Crawford's patents were based on Byrd's idea. At a videotaped deposition Crawford gave as part of the Oasis trial, he offered up a surprising defense. He argued that the sentence didn't actually mean the idea was Byrd's, because he, Crawford, had used the apostrophe "s" incorrectly.

Attorney:

"I'm asking you, though — you certainly know what the use of an apostrophe 's' means, do you not?"

Chris Crawford:

"As I've written documents over the years, there are times when I use an apostrophe 's,' and it seems like I'm supposed to use an apostrophe 's.' But I have to say that my grammar is not strong enough to tell you right now with clarity when an apostrophe 's' is used."

His explanation apparently did not convince the jury, which concluded that the patents were indeed invalid for failing to name the correct co-inventors. Carbonite won, and yet its lawyers say the victory just shows how difficult it is for a company to defend itself against a patent infringement claim.

The jury concluded that Byrd should have been listed as a co-inventor, but not Campos and Atwood, the other men who testified under oath that they too had been involved in developing the ideas. Only Byrd's name had been on that document, so only Byrd got credit from the jury as a co-inventor. Lawyers for Carbonite believe that if not for that document mentioning Byrd, the jury might not have invalidated Crawford's patent, and Carbonite might have ended up paying damages.

For the 16 companies that did settle with Oasis, the verdict may not change anything. In most cases these licensing agreements have language that makes them nearly impossible to get out of — no matter what happens with the patent.

A spokesman for one of the companies that settled sent us an email saying:

"We were hit hard by this lawsuit. Infringement on our part seemed completely bogus, but we could not afford to fight it. Even with the settlement, we were forced to lay off employees. We are STILL paying out on the settlement agreement. We were unaware that the patent had been invalidated. We will be contacting our attorney to see what recourse we may have."

It's unknown how much money Oasis received from those licensing arrangements. We do know how much it wanted from Carbonite. Danielle Sheer said Oasis proposed a $20 million license fee plus a portion of revenue going forward.

Tom Ewing, an intellectual property lawyer who studies patent infringement cases, says, assuming Oasis was asking for settlements in rough proportion to the size of the company being targeted, a pretty good estimate of its total take "might be in excess of $100 million."

Who gets that money?

Because of documents filed with the court, we now know that Intellectual Ventures, owned by Nathan Myhrvold, gets 90 percent of Oasis Research's net profit. Intellectual Ventures sold Crawford's patents to Oasis on this condition.

And Crawford didn't make out too badly, either. The documents say he gets 17 1/2 percent of the money that Intellectual Ventures makes.

This kind of money makes the business of suing based on patents a very lucrative one, and it's getting easier. Every year more patents are issued than the year before. According to a Yale study, it's a hundred software patents a day.

"It took 121 years for us to get the first million patents," says Ewing. "Now it takes, more or less, six years to get another million patents."

On Tuesday morning, the Obama administration announced it would be taking action against what it termed "abusive" patent lawsuits. You can read more about that in our post detailing what the administration is proposing.

And I'm Audie Cornish. This week President Obama called on congress to make life harder for companies called patent assertion entities. Many in Silicon Valley call them patent trolls. These companies don't make anything. They buy up patents and use them to sue people who do make things. Last year, about 60 percent of all patent lawsuits were brought by these so-called trolls.

Two years ago, NPR's Laura Sydell and Planet Money's Alex Blumberg investigated a company called Intellectual Ventures, that some say is the biggest patent troll of them all. They recently revisited the story and discovered it had taken some surprising twists.

LAURA SYDELL, BYLINE: Back in 2011, I put the question of whether or not Intellectual Ventures is a patent troll to its co-founder Nathan Myhrvold. Are you a patent troll?

NATHAN MYHRVOLD: Well, that's a term that has been used by people to mean someone they don't like who has patents.

ALEX BLUMBERG, BYLINE: Intellectual Ventures, says Myhrvold, is anything but. He says it's in the business of promoting innovation, supporting inventors who hold patents but can't make money off of them because companies are stealing their ideas.

SYDELL: That's where Intellectual Ventures comes in. Intellectual Ventures buys their patents and licenses them out to companies that make stuff. Two years ago, when we first visited Intellectual Ventures, they gave us an example of an inventor they'd helped, a guy named Chris Crawford. Joe Traneski, a vice-president at Intellectual Ventures is one of two people who mentioned Crawford.

JOE TRANESKI: The neat thing about Chris is he had no idea how to get money for his patents. He eventually found Intellectual Ventures, so we bought those patents.

SYDELL: So I figured I want to talk to this guy. Not so simple. It turned out that trying to talk to Chris Crawford took us on a multi-year odyssey where things didn't exactly fit the story that Intellectual Ventures was telling us. It started when I called Intellectual Ventures to get Chris Crawford's contact info. I got a strange email back in response. I was told they no longer own Christ Crawford's patent.

BLUMBERG: We did eventually locate Crawford on our own but he never responded to our many emails and phone calls. He had four patents, all pretty similar, and we focused on one of them, patent 5771354. He got it in 1998, back in the relatively early days of the Internet.

SYDELL: The patent says, this invention makes it possible to connect to an online service provider to do a bunch of stuff - software purchases, online rentals, data backups. The patent makes it seem like this one guy, Chris Crawford, invented a lot of what we do on the Internet every day. We weren't sure what to make of this, so we turned to an expert.

BLUMBERG: Rick McCloud is a patent lawyer and former software engineer who we asked to evaluate Chris Crawford's patent. So he went on a search to see if anyone else in the field was already doing the thing Chris Crawford claimed to invent in 1993 when he first filed his patent.

RICK MCCLOUD: There were institutions, both academic and businesses, that used computers in this way. And I think it's a very interesting collection of things that were well known in the 1980s.

SYDELL: In patent language, there's lots of prior art.

MCCLOUD: None of this was actually new.

SYDELL: Do you think this patent should've been issued in the first place?

MCCLOUD: No, I don't.

SYDELL: People in Silicon Valley will tell you that the problem with software patents today is that all kinds of things are getting patented that aren't breakthroughs and don't deserve a patent. They're too broad or too obvious.

BLUMBERG: And the problem with broad, obvious patents is that it's easy to use them in the way we discovered Chris Crawford's patents were being used, to sue people for patent infringement.

SYDELL: After Intellectual Ventures sold Crawford's patent, it ended up in the hands of a company named Oasis Research. Less than a month after getting these patents, Oasis Research started suing people.

BLUMBERG: There was hardly any public information about Oasis Research. One of the few details that was available, an address in Marshall, Texas, 104 East Houston Street, Suite 190.

MICHAEL SMITH: Right now, we're going into the first floor of the Baxter Building, which is 104 East Houston.

SYDELL: This is Michael Smith. He's an attorney in Marshall, Texas who does mostly patent cases. He agreed to show us the offices of Oasis Research. They're in a nondescript two-story building on the town's main square, two doors down from the federal courthouse.

SMITH: And here we go, suite 190, Oasis Research, LLC.

BLUMBERG: It was late morning on a weekday, not a holiday, but the door was locked. Through the crack underneath you could see there were no lights on inside. Marshall is a very small town, 24,000 people. Michael was born and raised here, so we started quizzing him about Oasis.

SYDELL: Does it have any employees that you know about?

SMITH: Not that I know of.

SYDELL: Have you ever seen any people coming in and out of that office?

SMITH: No, I haven't.

SYDELL: If you don't mind, I'm going to knock on the door and just see if there's anyone here today.

BLUMBERG: I know this is kind of cliche at this point, knocking on the door of the suspected fake office...

SYDELL: Nothing.

BLUMBERG: ...but we'd flown a long way. According to information the Obama administration released this week, there are thousands of companies like Oasis Research out there, companies that don't seem to make anything or have any employees, whose only business seems to be suing other companies for patent infringement.

SYDELL: We'd come to Marshall to figure out which story about Intellectual Ventures was true. Was it a patent troll or a protector of struggling inventors? Two years ago, this empty office was where the hunt for information about Chris Crawford and Intellectual Ventures ended.

BLUMBERG: But in the intervening two years, the lawsuit that Oasis was filing at the time has now concluded. And because of information that came out at trial we can now answer a lot of the questions we couldn't back then.

SYDELL: Of the 18 companies that Oasis originally sued, 16 settled. Only two went all the way to trial, EMC and Carbonite. Full disclosure: Carbonite is an underwriter of NPR news programs.

BLUMBERG: Lawyers for the two companies dug into Chris Crawford's history looking for clues that might invalidate his patent, clues for example, that he had not told the truth when he first filed it.

SYDELL: One of the first places they went looking was the company where he was working at the time he claimed to have come up with this idea. Here's Carbonite's chief counsel, Danielle Sheer.

DANIELLE SHEER: We located some individuals who had worked with Chris Crawford in the early 1990s.

BLUMBERG: Specifically, Crawford's boss who told the lawyers, yes, I was with Crawford when those ideas and the patents were developed. And they weren't only Chris Crawford's ideas. The idea for a remote online backup system mainly came from two other guys, Jack Byrd and Don Atwood. They'd come up with the idea to solve a problem that they themselves were having.

SHEER: This was in 1990. Don Atwood and Jack Byrd are business partners.

SYDELL: They had a technology consulting company and they were backing up all their important files on floppy disks. They thought, there's got to be a better way. How about backing up our data remotely over the phone line using a modem? We should start a company that does that.

BLUMBERG: And this, finally, is where Chris Crawford enters the picture. He was invited to be part of the small group trying to get this backup company off the ground. There were four people involved. Crawford was the last one at it.

SYDELL: They met regularly on Saturdays at Jack Byrd's apartment but they never figured out a way to get consumer online backup working using the technology available in the early '90s, phone lines and modems. So they disbanded the company.

BLUMBERG: But all those meetings where they'd been figuring out how this backup system would work, Chris Crawford had been the main note taker.

SHEER: A couple years later, Chris Crawford, he ends up filing some patents and he uses the documents that he's created in these meetings to prove that he has this idea for the patent and to come up with the claims.

BLUMBERG: His three former business partners have no idea Crawford is doing this. And once he gets his patents, he doesn't start a business of his own. He sells the patents to Intellectual Ventures for $12 million plus a cut of all future proceeds.

SYDELL: The problem was that Chris Crawford had sold a patent for $12 million that did not give credit to the other inventors. If Chris Crawford's three former business partners had also developed the idea, they too should've been listed as co-inventors on the original patent applications.

BLUMBERG: But how to prove this to a jury?

SHEER: In the thousands of pages that Chris Crawford submitted to the patent office in order to obtain his patents, one of the documents had a sentence that said that this is in response to Jack Byrd's idea to provide online backup. And, of course, one of the excellent attorneys that worked on this for EMC and Carbonite located that document and questioned Chris about it.

(SOUNDBITE OF DEPOSITION)

UNIDENTIFIED MAN: The May 23, 1992 proposal, which is marked as Exhibit 10.

CHRIS CRAWFORD: Yes, I'm looking at it.

UNIDENTIFIED MAN: All right.

SYDELL: And here he is, the man we've been looking for, Chris Crawford. This is sound from a videotaped deposition he gave as part of the Oasis trial. He's polished, crisp white shirt, tan tortoiseshell reading glasses.

BLUMBERG: And he offers a rather surprising explanation for how the sentencing that this business was quote, Jack Byrd's idea, doesn't actually mean that the business was Jack Byrd's idea. His explanation, he was using the apostrophe S incorrectly.

The lawyer asked him to clarify.

(SOUNDBITE OF DEPOSITION)

UNIDENTIFIED MAN: You certainly know what the use of an apostrophe S means, do you not?

CHRIS CRAWFORD: I have to say that my grammar is not strong enough to tell you right now with clarity when an apostrophe S is used.

BLUMBERG: This explanation apparently did not convince the jury and Oasis lost the case. But for the 16 companies who settled, it's probably too late. Legally, it'll be tough to get their money back.

SYDELL: A spokesman for one of those companies wrote in an email, quote, "we were hit hard by this lawsuit. Infringement on our part seemed completely bogus, but we could not afford to fight it. Even with the settlement, we were forced to lay off employees. We are still paying out on the settlement agreement."

BLUMBERG: The Oasis case gives us a unique glimpse into the normally hidden economics of patent lawsuits. Usually in these cases, everyone settles and signs a nondisclosure agreement. But because Carbonite won at trial, they were happy to reveal how much money Oasis wanted from them.

SYDELL: Carbonite's chief counsel, Danielle Sheer.

SHEER: Well, the original number that was thrown out, I don't think it was official, was they wanted 20 million.

SYDELL: Based on this number, one expert we talked to thought Oasis might have brought in as much as $100 million suing people with Chris Crawford's patents.

BLUMBERG: $100 million. And who got that money? Well, according to documents filed with the court in Texas, 90 percent of the net profits went to Intellectual Ventures - 90 percent of potentially tens of millions of dollars. Intellectual Ventures declined our request to comment on this number.

SYDELL: Chris Crawford didn't make out too badly, either. The documents also say that Chris Crawford gets 17.5 percent of the money that Intellectual Ventures makes. Chris Crawford did not respond to repeated requests to comment for this story.

BLUMBERG: Because of the money you can make, lots of people are entering the patent assertion business. According to figures the president released this week, the number of patent assertion entity lawsuits in 2012 was nearly double what it was just a year earlier in 2011.

SYDELL: But as suits like this increase, more and more people in business interests want change - the tech industry, the supermarket industry, the consumer electronics association, Google, and now the president of the United States. I'm Laura Sydell.